Small businesses have historically contributed a stable 50% of U.S. gross domestic product (GDP), which is the sum total of goods and services provided by U.S. companies from domestic locations. These statistics are tracked and analyzed over the years by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). “Small” is defined as a company with 500 employees or less, and the data cover 16 industries in non-farm sectors.
Some of the industrial sectors have a higher proportion of small companies contributing. For example, five sectors have small business shares greater than 50 percent: real estate and leasing, professional and technical services, health and social services, arts and entertainment, and accommodation and food services. One industry, holding companies, is about equally split between large and small businesses. These holding companies can be of any type, really.
The House of Representatives Small Business Committee reports other important data. Small businesses represent more than 99 percent of all employers, employing 51 percent of private-sector workers and 40 percent of workers in high-tech jobs. Small businesses are highly regarded for job creation, responsible for producing 60 to 80 percent of all the new employment. Between 2002 and 2003, small businesses added two million jobs. They also produced 51 percent of private sector output as well as represented 97 percent of all exporters of goods. In San Diego, we have somewhere around 95,000 business entities. At last count, 95% of them employed 100 or less people. And 90% employed 50 or fewer people.
So while our headlines pay attention to the catastrophes of the gargantuan, and the massive financial response of our government, there are unsung heroes who are, without fan-fare or a bailout, working their tails off to address the economic challenges. These small businesses, who make up the vast majority of new job growth and half of our economic output, aren’t getting a dime from the Treasury, while at the same time they are finding it incredibly difficult to obtain financing of any sort. They face the biggest drop in business in at least 25 years. What are they doing about it?
Let’s ask Mona Khoury, CEO of one of those “small” companies, CSG Visual Communications, headquartered in Poway.
“Our company has been in business for over twenty years. We’ve experienced the roller coaster through at least two other down cycles. We’ve applied basic fundamentals in our business all along, but they have never been more important than now”, Mona explained.
“What kinds of fundamentals are you referring to?” I asked.
“The list is long,” Mona replied. “But it includes such simple concepts as building cash reserves, keeping debt low and only borrowing what you can safely service from business operations, not growing too fast and stretching cash flow too far, focusing on cash flow and profitability first while revenue growth is second, continually recruiting for the right talent, and many other principles.” Mona took a breath. “And over the years we have established strong relationships with our vendors, employees and customers that become paramount during these times.” I asked her to expand on that.
“It’s because of our strong relationships, and how we do business with people, that we are able to obtain ‘relationship financing’ during this period where credit and outside financing are essentially unavailable” she explained. “Let me give you an example.
“We have a major customer whose operating line of credit has been cut in half by their bank, which is experiencing write-offs and had to adjust their balance sheet to match. This customer has a big job going on and they must finance their business out of receivables more than they used to. They asked us to modify our contract to take on the cash flow risk at a level higher than we felt we could accept, because we are in the same boat with financing options. We then went to our suppliers and explained the chain of cash flow issues that our customer and we were facing. The suppliers explained their situation as well. Because we have trust and respect for each other—customers, CSG and our suppliers—we had no difficulty being completely candid and finding a way that worked to everyone’s benefit. We ended up changing our delivery and billing modestly, but it allowed the customer a month improvement on their own billing cycle, while our suppliers added enough breathing room to our payables to keep us all out of cash flow hot water. We’re financing our businesses by working together openly, without going to the bank or investors. And we’re not extending our payables without talking to our suppliers, like some companies do, using their vendors as involuntary banks” Mona concluded.
“So what you’re saying is that your net of relationships is a safety net during hard times, to help all of you weather the storm and return to growth as soon as possible” I ventured.
“That’s right,” Mona agreed. “And we didn’t have to wait long for that growth. We’ve been growing. This year is looking like an acceptable rate of revenue increase as well, which we can handle without jeopardizing our fundamentals…or our relationships.”
Long before the bail-out monies are all spent, small businesses will have led the way out of this mess.